Impact of Brexit on VAT, balance of trade and growth: what recent data suggest

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Written by Emma Roberts

Published: 29 June 2017

Last Updated: 30 June 2017

Britain are due to leave the EU when Big Ben bongs at Midnight on 29th March 2019. This will be a pivotal moment for the history books, and one at least 48% of the voting population did not wish to witness. The British people would have waited nearly three years for this event, following the vote, so understandably the UK will be weary of the whole thing by then.

Brexit will impact us all in some way but the flexibility of being your own boss (as a Company Director), and the tax benefits of working through your own Limited Company; with up to date advice from our Accountants or the option to work through our Umbrella PAYE services, allows you to keep your options open and has never been easier, with our friendly, efficient and cost-saving services.

BREXIT

First, we had to vote after listening to all the politicians spout their frankly inaccurate and alarmist arguments, then the shock result which surprised the commentators and money markets who had clearly predicted a remain outcome.

A new Prime Minister was then hastily installed, her focus and much of her rhetoric has been “Brexit negotiations” and “Brexit means Brexit”. Her objective; to give the impression of a strong and stable government. Due to many factors, not least of all the snap election, the country feels anything but strong and stable. Brexit is expected by many to have a negative impact on the UK in the short term and that the other EU states may make an example of the UK as to why you don’t leave the EU.

The vote to leave could be one of the most important gambles this country has ever faced. Much of the language around Brexit, in both the for and against arguments, is rather negative. The build up to negotiations has created a lot of uncertainty too. Now it seems there is a very British, "let’s get on with it", attitude, so that we can look forward to some stability.

Is it all doom and gloom though? Could this divorce from the EU be an opportunity to ultimately change some of our economic models, which have grown to closely resemble over the years those of the other European member states. Could we create a real competitive advantage, after all it is a global economy?

VAT

What might happen to the current model of VAT taxes, for example? VAT became a stipulation of joining the EU in 1973. VAT is imposed on all member states, and although the rate can be set by the country, it can’t be lower than 15%. VAT is an indirect tax on consumers, with businesses operating as pseudo unpaid tax collectors. VAT impacts almost every member of our society, the poorest proportionately most of all. It’s much more widely accepted by society than income tax, or inheritance tax and in the tax year 2015/2016, VAT receipts in the UK equalled £115.1 Billion.

What could happen to VAT after Brexit? Well, there have been calls to increase the threshold significantly (currently £85,000), and of course simplify VAT rules (of which there are many). It’s unlikely that the UK government will change the current VAT structure, rate or threshold significantly, as they will want to stay as close to the European model as possible to avoid uncertainty, at least in the short term. Reducing VAT isn’t seen to help businesses directly or encourage businesses to base themselves in the UK as it really affects the consumer the most.

Reducing the VAT rate could be a real opportunity to increase consumer spending in the UK, a boon to the economy and therefore indirectly helping business. The VAT rate was 15% between 1979 and 1991, until it was upped to 17.5%. It did reduce to 15% again briefly around the financial crisis in 2008, but then steadily increased to its highest current level of 20%. Leaving the EU will mean the UK will be free to set its own economic VAT Model, surely?

Phillip Hammond made a barely veiled threat earlier this year that if the EU closes its doors to the UK, post Brexit, then the UK would set about becoming a competitive country, from a tax point of view, without the enforced European style. Why not do this anyway? If you’re going to do something at all then why not do it properly!

Import and export

So, what happened when the country voted to leave? The sterling exchange rate dropped to its lowest level since 1967, as previously mentioned, the money markets predicted that leaving the EU would make trading with the EU harder. Why is this? Well it is because as exporting becomes harder (albeit more profitable), currency needs to be cheaper. Exporters have seen an increase in their prices (due to the exchange rates) of 12%.

The exchange rates dropping is bad news for importers though. In 2015, the United Kingdom exported $425B and imported $606B, resulting in a negative trade balance of $181B. We import a lot of stuff; top of the list is cars, followed by packaged medicaments (drugs and medical paraphernalia), and then petroleum, making us the 4th largest importer in the world. Other than our homes, cars become one of the major capital purchase we make. The exchange rate therefore, matters hugely.

Based on those figures we should manufacture more electric cars, if we are to import less!

UK Economy

How does this affect us, the people? Recent figures suggest an increase of 10.3% in consumer credit (loans/credit cards). Rises in import prices will have a real effect on us all, as most people own a car, and must fuel it; and at some point, utilise medication. It is no coincidence that consumer credit is increasing in line with the increase in import prices, a real squeeze in household income, and this of course affects inflation (currently 2.9%) and the consumer price index.

This week after a mere suggestion that the interest rates may rise at the end of the year, the pound jumped 1%. This shows how quickly things can change. Some of the experts believe that when the Brexit negotiations are over, and we know where we are, so to speak, the exchange rates will recover. That seems a long way off.

The Bank of England vote to increase the interest rate has creeped up to 5-3, in favour of keeping it at 0.25%. Changes in the BOE rate will depend on the economy, but people consuming drive the economy, and if that is becoming more expensive, and it could be a long time before we see business investment and export market growth.

Outside the EU

With the global economy becoming ever more important the UK are already looking to make free trade agreements outside of the EU, but diplomats of the EU have warned against any firm arrangement before Brexit negotiations are complete. The prime minister has said she intends to make the UK a leading global free trade champion, negotiating new agreements with countries such as the US, China, India, Australia and New Zealand.

These free-trade agreements with countries outside the EU could be illegal until Britain leaves, and besides there is a risk of antagonising the EU at a time when Britain will be seeking to strike the best possible exit deal.

A great deal of our financial world does seem to hinge on, or relate in some way to the Brexit negotiations; so maybe Theresa May was right to bang on about Brexit and virtually nothing else. If only she hadn’t called the election, things might be a whole lot better.

Hindsight is a wonderful thing. If we had our time over again, and were allowed another vote over Brexit, now that people know the possible costs and implications, would the result be different? I know what I think.

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